What You Need To Know About Foreclosure Laws

A foreclosure happens when a lender takes back property from a borrower who has defaulted on their mortgage loan. Usually, the mortgage holder sells the foreclosed property at a public auction to the highest bidder. Though mortgage foreclosures laws can be quite different from state to state.

State laws determine things like whether a mortgage holder must file a lawsuit to foreclose or if the borrower can be held liable for the shortfall if the property sells for less than what they owe. State law also determines whether borrowers have any reinstatement or redemption rights. In short, how a homeowner experiences a foreclosure is highly dependent upon where that foreclosure occurs.

The Foreclosure Process

No matter what state you live in, foreclosure is typically a lengthy process with well-defined steps. 

Missing Payments

The first step to a foreclosure is a missed mortgage payment. If you’re less than 30 days late with a payment, your mortgage servicer will likely send you a letter and may add late fees. Once you’re 30 days late, the servicer will probably start sending you more formal-looking demand letters. These letters may explain that you are in default, or they may warn you that you are in danger of defaulting on your mortgage. Your servicer may also describe what you can do to avoid foreclosure, like apply for a forbearance if you’re having financial difficulties.

Defaulting

The definition of a mortgage default depends on the state you live in, but it usually means that you’re more than 30 days late on your payments. If you default, your servicer will send you an official notice of default. You’ll often also be charged late fees, legal fees, and other fees as allowed by your mortgage contract and state law. These charges will continue to accumulate if you can’t bring your payments current. If you become 90 days late on your mortgage payments, you’ll start getting foreclosure warnings.

Initiating Foreclosure

The mortgage servicer — called the mortgagee — will usually initiate foreclosure proceedings after payment is 120 days late. The total time that a foreclosure takes depends on the state, the type of foreclosure, and the type of mortgage. It can take six months or longer for the lender to get a clear title to the mortgaged property. Once this occurs, the mortgage holder will send a notice of sale to the borrower — called the mortgagor — that indicates the foreclosure sale date. Before the sale, the homeowner may still reinstate the loan (if state law allows) or file bankruptcy to stop the foreclosure.

The Foreclosure Sale

The foreclosure sale is usually a public auction, where the property will go to the highest bidder. If the property does not sell at the auction, the lender can keep it as an REO (real estate owned) property and try to sell it later. If your foreclosed property sells at the auction but the sale price isn’t high enough to cover your mortgage balance, some states will allow the mortgage holder to sue you for the difference to get a deficiency judgment. If the property sells for more than your mortgage balance, you will have the opportunity to claim those surplus funds later.

After the Sale

After the foreclosure sale, the prior owner may still have a right to redeem (get back) the property under state law. If that doesn’t happen, the last step of the foreclosure process is that the new owner must evict the occupants of the property. State law will probably outline the specific timeline. After that deadline expires, it may be necessary for the local sheriff to remove them and their belongings from the property.

If you are facing foreclosure and are unfamiliar with the process, you should contact your loan servicer or seek professional advice from a foreclosure attorney. If you owe more than your home is worth and you are in a state that allows deficiency judgments, you may want to consider filing Chapter 7 bankruptcy. This can prevent you from getting hit with a deficiency judgment.

State Foreclosure Laws

State laws govern much of what happens in a foreclosure because they determine the procedures and processes that the lender can use to foreclose. State law also affects how the courts treat foreclosures by determining which foreclosure defenses are available to the borrower and whether the lender can seek a deficiency judgment against the borrower.

If you’re behind on your mortgage payments, you might consider talking to a housing counselor from the U.S. Department of Housing and Urban Development (HUD) in your state about foreclosure prevention. If you speak to a HUD counselor early on, it may help you make decisions about what steps to take before you face a foreclosure sale. Your lender’s default notices and letters may also provide contact information for HUD counselors.

In addition to speaking with a HUD counselor, you should also review your state’s laws to understand your rights during a foreclosure. You should know, for example, how much notice you are entitled to before the property is sold at auction and whether the mortgage holder can sue you to get a deficiency judgment for the unpaid mortgage balance. If you have additional questions or are still feeling uncertain, you should consult with a qualified foreclosure attorney in your area.

Judicial vs. Nonjudicial Foreclosures

The 120-day period before a mortgage lender starts the foreclosure is known as the loss mitigation period. This period gives the homeowner time to either catch up on payments or work out a forbearance, mortgage modification, short sale, or other payment arrangement with the lender.

After the loss mitigation period expires, state law determines what kind of foreclosure procedures a mortgage holder can use. The three major types of foreclosure processes are judicial, strict, or nonjudicial. In some states, foreclosures are always judicial. In other states, they can be either judicial or nonjudicial. Strict foreclosures are only permitted in a few states.

In both judicial and strict foreclosures, the mortgage holder must file a foreclosure action in court against the borrower. In a judicial foreclosure, the mortgage holder submits an affidavit to get a court order and force the sale of the property. In a strict foreclosure, the court will order the property to be immediately transferred to the lender instead of being sold. In states where they are permitted, strict foreclosures are commonly used when the borrower owes more than the property is worth.

In a nonjudicial foreclosure, the mortgage holder doesn’t have to file a lawsuit at all. Typically, a nonjudicial foreclosure is possible if the mortgage contains a power of sale clause. This kind of clause is most often found in deeds of trust. The lender in a nonjudicial foreclosure must still provide notices and observe waiting periods that are required by state law and the mortgage loan documents.

Foreclosure Sale

In most states, mortgage holders are required to sell a foreclosed property at public auction. If the property doesn’t sell at the auction, the mortgage holder can hold onto the property as an REO (real estate owned) property and try to sell it at a later date.

If the foreclosed real property sells for less than the borrower’s mortgage balance, some states allow the mortgage holder to sue the borrower for this deficiency. Typically, the mortgagee will get a deficiency judgment from the court, followed by a garnishment order for the mortgagor’s wages or assets. Some states don’t allow deficiency lawsuits.

In rare cases, the foreclosed property sells for more than what the borrower owed on the mortgage. If this happens, the homeowner is entitled to any funds that are left over after other debt on the property (a second mortgage or taxes, for example) gets paid and the mortgage holder gets reimbursed for its expenses. These leftover funds are called surplus funds. Foreclosure surplus fund scams aren’t uncommon. If your home is foreclosed and you start getting mail about a surplus, contact the person or entity that sold the property to make sure the claims are real.

Right of Redemption

In some states, homeowners have a limited redemption period to repurchase or redeem their foreclosed property, even after it is sold. Depending on your state, you would either need to reimburse the buyer for the amount paid at the sale (plus allowable costs) or repay the entire mortgage debt plus interest and the lender’s costs.

Right To Reinstate Before the Foreclosure Sale

Even if you’ve already received a notice of default, state law may still give you the right to reinstate your mortgage before the foreclosure sale. You may only be able to exercise this right up until a specific deadline. You would need to make up all missed payments and pay certain expenses related to the foreclosure, like attorney’s fees and court fees. A successful reinstatement would mean that you’d return to the original payment plan. Even if your state law doesn't provide you with the right to reinstate, your mortgage or deed of trust might.

Let’s Summarize...

Mortgage foreclosures are performed in different ways throughout the country because of variations in state law. State law determines the kind of foreclosure procedure a mortgage holder can use — whether it’s a judicial, nonjudicial, or strict foreclosure. Lenders seeking a judicial or strict foreclosure must submit an affidavit to get a court order. When a state allows a mortgagee to do a nonjudicial foreclosure, the ability to foreclose usually comes from the deed of trust’s power of sale clause. 

Borrower reinstatement rights, redemption periods, and deficiency judgments are all additional matters determined by state law. Homeowners facing foreclosure should make sure they understand their rights, whether by consulting a HUD counselor in their state, hiring a local foreclosure attorney, or both.